College-Loan Defaults Up, Reversing 9-Year Trend

After almost a decade of steady decline, the rate of students
defaulting on college loans increased slightly in the latest year for
which figures are available. Federal officials described that rise as
statistically irrelevant, but some financial-aid observers said it is a
potentially troubling turn.

The default rate climbed to 5.9 percent for fiscal year 2000, up
from 5.6 percent the year before. That upward blip came after nine
straight years of falling rates, from a peak of 22.4 percent in
1992.

Some loan advocates said that while it was important to identify the
possible causes behind the higher default rate, released Sept. 12, a
single bad year wasn't enough to trouble them.

"With an increase that small, anything could have caused it,
really," said Kenneth E. Redd, the director of research and policy
analysis at the National Association of Student Financial Aid
Administrators, a Washington organization that assists colleges on loan
issues. "Next year's numbers will be a much greater indication of the
default rate."

At this point, the increase was more likely to prompt interest on
Capitol Hill than serious worry among financial-aid gurus, Mr. Redd
speculated. Recent events seemed to bear that out. When the latest data
were released, Rep. George Miller, D-Calif., the ranking Democrat on
the House Education and the Workforce Committee, sent a letter to
Secretary of Education Rod Paige, asking for an explanation. Mr. Paige,
in announcing the latest numbers, had linked the default increase
partly to the poor economy's impact on borrowers.

"I am disturbed that the default rate has increased after nine
straight years of decline," Rep. Miller said in a statement, warning
that the Department of Education should guard against increases
"reminiscent of the 1980s and early 1990s."

Ellynne Bannon, an advocate for the State Public Interest Research
Group, a consumer-watchdog organization in Washington, voiced concern
about default rates creeping upward as students are piling up more debt
than ever. Average student-loan debt rose to $16,928 in 1999-2000,
almost twice the amount as eight years before, according to Education
Department data.

"When you think about the two things together, that could give you
cause for concern," Ms. Bannon said.

'Optimum' Default Rate

Education Department officials acknowledged that higher debt and
rising tuition are having an impact on students. But while promising to
respond to Rep. Miller, Jeff Andrade, the department's deputy assistant
secretary for postsecondary education, also said the higher default
rate might simply reflect minor shifts in the pool of student borrowers
and institutions.

Overall, the low rates tell a story of success, Mr. Andrade said:
The department has given schools and private lenders more flexibility
in dealing with students who fall behind on loans, while continuing to
crack down on schools that failed to counsel students on default.

"There is a heightened awareness on college campuses that loans have
to be repaid on time," Mr. Andrade said.

The national default rate measures loans made to students at about
6,400 higher education institutions who participate in the William D.
Ford Federal Direct Loan Program and the Family Federal Education Loan
Program. The former program allows students at participating schools to
borrow directly from the federal government; the latter provides access
to federally guaranteed loans from private lenders.

Students, who generally are required to begin repayment six to nine
months after graduating or quitting school, are considered in default
after 270 days without a payment. The latest estimates represent those
with payments due on Oct. 1, 1999, who defaulted sometime before Sept.
30, 2001.

While the federal government administers loans, colleges and
universities bear much of the legal responsibility for counseling
students on how to manage their debt. In the 1980s and 1990s, Congress
increased this obligation, and gave the Education Department more power
to cut off schools from loan programs.

Over the past decade, agency officials have barred nearly 1,200
schools from federal student-loan programs because of high default
rates, including five who stand to lose eligibility this year.

Default rates below 6 percent were "almost an optimum" level, or
about the lowest possible, said Deputy Secretary of Education William
D. Hansen. With interest rates as low as 4 percent, this is a great
time to borrow, he said.

"This is only the second [year] in history the default rate's been
under 6 percent," Mr. Hansen said last week. "We need to keep it in a
relative perspective as to where we are."

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